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Managing your credit cards used to be as simple as paying your monthly bill on time. Unfortunately, the world of credit cards has changed, and so have the rules that govern prudent credit card usage. As credit card companies tighten lending terms to protect their sagging bottom lines, tens of thousands of consumers have seen their credit limits slashed, interest rates increased, minimum payments hiked, or all of the above.
Even consumers with good credit rating and a long-term history of regular payments have not been spared. Credit card companies are reviewing their accounts looking for signs of distress, and they are targeting cardholders that fit their criteria of high-risk behavior.
Expect to see these changes intensify up until August of 2010, when the last provisions of the new credit card legislation step into effect, curtailing some of card issuers’ ability to make changes. To protect yourself in the not-so-brave new world of credit cards and avoid nasty changes to your card terms, follow these new rules of smart credit card use:
1. Keep balances low. Card issuers are more likely to target card holders with high balances for interest rate increases, credit limit cuts, and even account closure. If your credit card interest rate goes up, so does your minimum payment, which in turn could jeopardize your ability to pay your bills.
Best practice recommendation: Ideally, follow the most basic rule of good credit card usage: pay your balance off in full each month. If you have to carry a balance forward, keep the balances below 30% of the card limit.
2. Be wary of balance transfers. Good 0% APR balance transfers are not just harder to come by, but in the current credit card environment, they can also have unintended consequences. A large balance transfer may be interpreted as a sign of financial distress, particularly if making the transfer means that you use up a high percentage of your total available credit. Ideally, stay away from balance transfers altogether, but if you have to take one out, follow the same rule as above: keep the transfer amount below 30% of the card limit.
Best practice recommendation: Before taking out a large balance transfer, call your card issuer and let them know why you’re taking out the transfer and when you plan to pay it back by.
3. Pay more than the minimum. Paying just the minimum on your account can be interpreted as a sign of financial distress, particularly if you carry high credit card balances. Unfortunately, often it is: if you can’t afford to pay more than the monthly minimum, your credit card debt is too high, and you’d do well to take steps to reduce it.
Best practice recommendation: Pay at least double what’s due on the card, and ideally 10% of the balance each month.
4. Use it or lose it. Inactive credit cards are more likely to be targeted for slashed limits or even account closings. Use the cards you want to keep regularly, at least two to four times a month.
5. Diversify. Forget about staying loyal to one credit card company. If you don’t already have several credit cards, now is the time to apply for additional credit cards. Having several credit cards gives you other options if your credit limit is cut or interest rates are increased on one of your cards.
Best practice recommendation: Avoid having so many cards that it becomes difficult to manage. For most people, having three to four credit cards is plenty.
6. Read that credit card mail. Most people habitually throw away those small-print notices from their credit card issuer. However, these days, more often than not, those notices contain information you can’t afford to miss. That written notice is the only warning you’ll get that your interest rate is going up, your card issuer has decreased your credit limit, or increased the minimum monthly payment on your cards.
